March 15, 2012

Lord Turner and his regulatory colleagues are to blame for the current obesities and anorexics of banks

Sir, I refer to Brooke Master’s “Alert on ‘shadow bank’ where she reports on Lord Turner’s recent speech at the Cass Business School in London, and in which he blamed others for “Myopic risk assessment and the delusion of low risk investments”. 

As a regulator Lord Turner should be ashamed of himself. By means of their capital requirements for banks that use weights based on the perceived risk of default; a risk which has already been cleared for by the banks by means of interest rates amounts of loans or investment and other terms, the regulators guaranteed that the banks were to become obese on whatever was officially perceived as not risky, and anorexic on whatever was officially perceived as risky. 

Lord Turner should in front of cameras try to answer the following two questions: 

1. If banks already look at the credit information provided by credit ratings when setting interest rates, amount to lend and other terms, is it intelligent for the regulators to also look at the same credit ratings, or similar risk perceptions, in order to define the capital requirements for banks? Is that not overdoing the nanny part a bit too much? Could that not lead to a dangerous overexposure to whatever is officially deemed as absolutely not risky? Like for instance to triple-A rated securities and infallible sovereigns? 

2. And is not the whole idea of lower capital requirement for banks when the perceived risks are low just a quite dumb idea to begin, knowing, as we do, that big systemic bank crises never ever occur because of excessive exposures to what is believed to be risky, but that they always occur because of excessive exposures to what was wrongfully believed as absolutely not-risky? 

Occupy Basel! Bank regulators should be made to wear cones of shame